August 14, 2008 – 9:19 pm

Like a brief distortion of interstellar space revealing a dark star untouched by light, Countrywide’s unnoticed second quarter 10-Q revealed a voracious bank-eater lurking dangerously nearby. Had the acquisition been complete before July 1, Countrywide would not even been required to file a 10-Q. But look what jumped out of the black hole:

Countrywide held $25.4 billion in pay option mortgages at the end of June; a full 12.4 percent of those loans were 90 or more days delinquent. Want to know more? Get ready to cringe: 83 percent of the portfolio was underwritten via low-doc or no-doc programs, and 72 percent of those borrowers still paying on the loans elected to make less than a full interest payment in June.

Average original LTV of 76 percent had increased to refreshed LTV of 95 percent — that’s the average for the entire portfolio, folks — by the end of April. What to know still more? Despite a severe delinquency rate well into double-digits, Countrywide’s own recast projections suggest that the worst of the portfolio’s recasts won’t hit until sometime in 2011 ($6.96 billion in projected recast volume, net of repayments).

That’s a homicidal 95 percent. Who was it that deliberately bled the lender dry and then dropped $24B onto Bank of America’s balance sheet. We may never know, but 95 percent is no accident, and Countrywide is on Bank of America’s life support, dragging both into the infinite gravity of the black hole.

The private equity model of stripping assets is finally on the deathbed. There is not going to be easy money for pirates to borrow to continue to loot companies, soak them debt, pay themselves handsomely, only let the companies they buy rot in a death sentence.

The rot will take place under the shooting stars of resetting option ARMs dancing across the sky:

These loans allow borrowers to pay less than the monthly accrued interest on their loans until they reset after five or 10 years or they reach 115 percent of the original mortgage amount, according to Countrywide. The reset can cause monthly payments to more than double. About 72 percent of its borrowers elect to pay the minimum amount.

Payments that more than double at the onset of a credit crisis are not likely to be repaid, even in the near term.

Countrywide clawed its way to the top of subprime with a kamikaze allegiance to greed. On the other hand, Bank of America’s interplanetary travel into subprime was relatively more pedestrian, and it wound up being force fed a heaping plate of Countrywide. Now Bank of America teeters on the fulcrum of implosion.


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